... an enormous step toward solving the problem of acid rain ahead of schedule and well below the estimated cost while c
MAKING WAVES
THE RIPPLE EFFECT The past few years has seen emissions trading ripple out throughout the world. The Paris agreement is an opportunity to leverage these efforts to inspire greater ambition, say Fred Krupp and Nathaniel Keohane
Shared global prosperity depends on robust
A good illustration of how market-based
growth in the world economy — without
policies can promote greater ambition
the carbon emissions that have fuelled
is the landmark US cap-and-trade
growth in the past. By capping and pricing
programme for sulphur dioxide, which has
carbon emissions, we can align economic
reduced national average concentrations
incentives with lower-carbon growth to help
of the pollutant by 76% since 1990 —
achieve this vision. Market-based policies
taking an enormous step toward solving
such as emissions trading channel capital
the problem of acid rain ahead of schedule
and entrepreneurial effort to the fastest and
and well below the estimated cost while
cheapest ways to cut emissions, making
creating hundreds of billions of dollars in
deeper reductions possible.
annual benefits. Market mechanisms also played central roles in the phase-out of
climate change programme was signed into law, the state has received more
It’s not hard to see why many companies
lead from gasoline, the implementation of
clean tech venture capital investment than
have been staunch supporters of emission
the Montreal Protocol, and the dramatic
all other US states combined. Bloomberg
trading. Indeed, the private sector — with
reduction in nitrous oxide pollution from
News recently ranked the Golden State the
IETA’s leadership — has played a critical
power plants.
best place in the US to do business, citing
role in catalysing and championing market-
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AS ADVOCATES FOR THE ENVIRONMENT, WE HAVE LONG CHAMPIONED MARKETS BECAUSE THEY CAN DRIVE AMBITION UP
the state’s visionary leadership on climate
based approaches. Well-designed carbon
GLOBAL LEADERSHIP
markets offer the combination of flexibility,
More recently, momentum on carbon
incentives, and guaranteed results that
markets has been building fast. Cap and
ensures that pollution targets are met while
trade has helped California be a global
California’s success has attracted the
leaving it up to the market to figure out the
leader in climate action. Nearly three years
interest of its North American neighbours.
best way to meet them, driving costs down.
into the programme, California has the
Québec and California have linked their
world’s most comprehensive cap-and-trade
carbon markets, creating North America’s
As advocates for the environment,
system, covering 80-85% of state-wide
largest cap-and-trade system and the first
meanwhile, Environmental Defense Fund
emissions. At the same time, the state’s
example of sub-national jurisdictions in
has long championed markets because
economy is in the midst of an impressive
different countries launching a joint market.
they can drive ambition up.
recovery. Since 2006, when California’s
Ontario, Canada’s most populous province
change as one of the markers of its success.
CLIMATE PROGRESS IN THE US AND CHINA IS CHANGING THE GLOBAL DYNAMIC
and home to a significant manufacturing
to climate safety, the International Civil
base, is developing a cap-and-trade
Aviation Organization (ICAO) is developing
programme to launch by 2017 and link to
a market-based mechanism for
California and Québec’s market by 2018.
consideration at its next Triennial Assembly
Having the largest US state and Canadian
in 2016. That would cap emissions from a
province in a formal, linked carbon market
global sector that accounts for roughly 2%
will help lay the foundation for further
of carbon emissions, and is growing
carbon market collaboration in North
fast — and would set a powerful
America and beyond.
precedent for international cooperation
President François Hollande, Ethiopian
on climate change.
Prime Minister Hailemariam Desalegn, Philippines President Benigno Aquino III,
Emission trading remains a cornerstone of the EU’s plans to step up its own ambition.
Another opening is in the forest sector.
Mexican President Enrique Peña Nieto,
Despite well-publicised ups and down
Tropical forests are not only crucial to
Governor Jerry Brown of California, and
— attributable in large part to the worst
stabilising the climate — they are critical to
Mayor Eduardo Paes of Rio de Janeiro.
recession since the 1930s — the EU ETS is
sustainable economic development for the
now performing well: it has overachieved its
communities and nations that rely on them.
How can we capitalise on this political
goals, leading to more reductions at lower
Carbon markets can play a key role in
moment and build on the momentum we
cost than expected. The fact that allowance
driving a new model of green growth in the
are seeing, to keep carbon markets growing
prices are low is a clear indicator of the
tropics. By allowing jurisdictional REDD+
around the globe?
low cost of emissions reductions — and
credits into their compliance markets,
an opportunity to ramp up ambition by
California and ICAO have the opportunity
The first step is a Paris agreement that
tightening the EU’s cap further, and even
to create positive economic incentives for
provides a solid footing for markets
expanding the coverage of the ETS.
forest protection at a landscape scale.
in the post-2020 climate regime. By markets, we don’t have in mind some
TAKING THE MOMENTUM TO PARIS
form of centralised mechanism under UN
China, where in September 2015 Chinese President Xi Jinping announced plans for
Fuelled by these on-the-ground successes
of Parties who would like to have such
a national emissions trading programme
around the globe, markets have moved
a mechanism available — and properly
by 2017. The insights gained and lessons
back to the centre of political discussions
designed, with provisions ensuring
learned from the country’s seven large-
with a pace that has surprised even
that any credits generated by such a
scale pilots already in place will be put to
us. One of us (Fred) was at the third
mechanism meet the highest standards of
use to help the world’s largest emitter meet
Conference of the Parties to the UNFCCC
environmental integrity, it could have an
its target of peaking emissions by 2030 at
(COP 3), when the market mechanisms of
important role to play.
the latest.
the Kyoto Protocol were negotiated — and
Perhaps the biggest development is in
oversight. To be sure, there are a number
we were both at COP 15 when the hopes of
But the more powerful role for markets
Climate progress in the US and China is
a “global deal” evaporated in Copenhagen.
will be in the new decentralised world
changing the global dynamic. Gone are
For a few years afterward, market-based
that is emerging. Markets not only provide
the days when the two largest emitters
approaches seemed to fall off the radar in
a powerful way for individual countries
blame each other for inaction. And
discussions of climate policy.
to meet their own commitments. Over time, as jurisdictional emissions trading
bilateral progress is inspiring commitments around the world. All told, cap-and-trade
Now markets are back. More than 1000
systems mature and take root, international
programmes are in place in over 50
businesses, nearly 100 national, state,
linkages can promote greater robustness
jurisdictions worldwide that are home to
provincial, and city governments, and
and liquidity, attracting new countries
nearly a billion people.
over 30 NGOs signed the carbon pricing
into a growing global market, and driving
statement released at the New York
greater ambition – as well as certainty
And more programnes are in the works.
Climate Leaders’ Summit in September
of environmental outcome, one of the
One of the most exciting opportunities is in
2014. In October 2015, World Bank Group
signature benefits of a mandatory
international aviation. To meet the sector’s
President Jim Yong Kim and IMF Managing
declining cap.
stated commitments to carbon-neutral
Director Christine Lagarde launched a high-
growth from 2020 and a 50% cut by
level panel on carbon pricing, including
Ideally, Paris will provide a political signal
2050, and help drive net emissions even
German Chancellor Angela Merkel, Chilean
that such international cooperation will be
lower as will be needed to turn the corner
President Michelle Bachelet, French
a core part of the new regime. But it’s not
IETA GREENHOUSE GAS MARKET
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MAKING WAVES
A DURABLE CLIMATE REGIME WILL BE ONE THAT HARNESSES MARKET FORCES IN THE HUNT FOR SOLUTIONS
effectiveness and environmental integrity
and, through rigorous and transparent
– which in turn will give jurisdictions the
reporting, allows countries to demonstrate
confidence to go faster and farther in
to each other that they are meeting their
reducing emissions.
commitment. The Paris agreement can help on each of these fronts, but the model
A CLUB OF CARBON MARKETS
here is an incremental one: Rather than
So far, the UNFCCC process has failed
fell swoop, a successful outcome in Paris
to make much progress on this front,
would contribute to growing momentum
needed. As sovereigns, Parties already
through the so-called Framework for
in the scope and effectiveness of climate
have all the authority they need to use
Various Approaches discussions that have
action around the world, over time. A
markets in meeting their commitments.
taken place since COP17 in Durban. An
UN agreement is only one of many tools
The UNFCCC enshrines cooperation
alternative approach may be needed —
available to address climate change. It will
as a central principle. And more than
one that starts small and engages only
take continuing strong action by leading
70 countries have already expressed
those countries and jurisdictions that
emitters and leading carbon market
an interest in using markets as part of
actually have an interest in implementing
jurisdictions to spur the technological,
their Intended Nationally Determined
emission trading.
political and institutional transformations that will support more ambitious action in
Contributions (INDCs) submitted to the UNFCCC.
seeking to solve climate change in one
Much as the General Agreement on
the years to come.
Tariffs and Trade (GATT) helped promote Where the Paris agreement does have a
trade liberalisation by attracting broad
Environmental Defense Fund president
role to play is in making sure that, when
participation in a plurilateral trade system,
Fred Krupp, who has guided EDF for more
markets are used, they have integrity.
a voluntary coalition or “club” of carbon
than three decades, is a widely recognised
In particular, the Paris agreement (and
market jurisdictions could promote climate
leader of the international environmental
the associated COP decision) should
action by attracting broad participation in
community. He is an influential voice on
articulate clear principles — on accounting,
mitigation effort. Such a coalition would
climate change, energy, and sustainability
transparency, and monitoring, reporting,
complement efforts under the UNFCCC,
issues, and an eloquent champion for
and verification — that rule out “double-
encouraging enhanced ambition by
harnessing the power of the marketplace to
counting” of emissions reductions. To
countries and allowing participation by sub-
protect our environment.
ensure the integrity and credibility of the
national jurisdictions as well as national
climate regime, and keep the atmosphere
and regional ones. Indeed, drawing on the
Nathaniel Keohane is a Vice President at
whole, emissions reductions achieved in
similar experience of the Forest Carbon
Environmental Defense Fund, where he
one country and transferred to another
Partnership Facility, the trust and expertise
leads EDF’s Global Climate programme
must only be claimed once.
gained from shared experience in a carbon
and helps to shape the organisation’s
markets club could lay a deeper foundation
advocacy for environmentally effective and
Even if the Paris agreement meets this
for cooperation on markets within the
economically sound climate policy. Nat’s
standard, however, much work will remain
UNFCCC itself.
areas of expertise include US and global climate and energy policy, the economic
to lay out clear guidelines for integrity
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of international carbon markets. As
A durable climate regime will be one
impact of climate change, the benefits and
momentum grows, coordination among
that harnesses market forces in the hunt
costs of reducing GHG emissions, and the
jurisdictions with carbon markets will be
for solutions, mobilises private sector
design and performance of cap-and-trade
increasingly crucial to maximising cost-
energies, enhances national self-interest
programmes and other policy instruments.
